Avoid this common investing mistake


At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Dear Dr. Don,
A recent column said that a $250,000 annuity would generate a monthly payment of $2,268, which would be a return of 1.7 percent. However, I calculate that $2,268 monthly would be $27,216 per year, which is an annual return of 10.8 percent. What gives?

More On Investing
Create a news alert for

— Jon Justify

Dear Jon,
You’re confusing the return of principal with the yield on the investment. It’s a common investor mistake, which is why I chose to answer your good question. Getting your money back is an important part of investing, but don’t confuse it with yield. Upon review, my numbers were correct in the column you are referencing.

There are several types of investments where the cash flow to the investor includes the return of capital. Aside from immediate fixed annuities, master limited partnerships and real estate investment trusts are two examples of investments that may return investor capital over time. Total return on the investment is the yardstick for investors in these investments, not the distribution rate.

Because the initial questioner was interested in a term certain annuity, it was easier for me to calculate the yield in a spreadsheet. If it had been a lifetime annuity, the yield calculation is based on the annuitant’s life expectancy. But the realized yield would vary based on the date of the annuitant’s death and any beneficiary options priced into the annuity.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.